IMF: Tax increases a drag on U.S. economy

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A crane removes a container from a ship at the Port of Baltimore's Seagirt Marine Terminal in Baltimore, in this March 1, 2013. AP Photo/Patrick Semansky, File)

WASHINGTON (AP) - The International Monetary Fund say the U.S. economy is on sounder footing than it was a year ago but is still being restrained by government spending cuts and tax increases.

The IMF's annual report on the U.S. economy released Friday noted that the underlying fundamentals are gradually improving: Home prices and construction are rising, household finances have strengthened and employers are steadily adding jobs. The outlook was much more optimistic than IMF's 2012 report.

"There are signs that the U.S. recovery is gaining ground and becoming more durable," Christine Lagarde, the IMF's managing director, said in a written statement.

Still, the IMF forecasts growth of just 1.9 percent this year, the same as in its report in April. That would be down from 2.2 percent in 2012. And it's below many private economists' expectations that the U.S. economy will grow more than 2 percent this year.

The IMF says the tax increases and spending cuts that kicked in this year will shave about 1.5 percentage points from growth. The international lending organization had opposed the steep federal spending cuts that kicked in on March 1.

The reduction in the U.S. budget deficit "has been excessively rapid and ill-designed," the IMF's report says.

Congress should cancel the $85 billion in spending cuts, the report urged, and replace them with longer-term reductions that would weigh less on the economy.

Despite the fiscal drag, the IMF paints a much brighter picture of the U.S. economy than it did last year. A year ago, the IMF warned that the recovery was "tepid," job growth was slow and U.S. households were still cutting debts.

Now, it sees growth steadily improving after this year. After the impact of the tax increases and spending cuts fade, growth should accelerate next year to 2.7 percent. That forecast also assumes that Congress and the White House agree to lift the government's borrowing limit later this year.

The IMF forecasts that the unemployment rate will average 7.5 percent this year and fall to an average of 7.2 percent in 2014. It is currently 7.6 percent, 0.6 percentage points lower than a year ago.

The economy is also being held back by weakness overseas, the report said, which are slowing U.S. exports, particularly to Europe.